the national interest

The Bush Tax Cuts: How Democrats Let Republicans Paralyze Washington

President Barack Obama signs the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 in the Eisenhower Executive Office Building of the White House, Dec. 17, 2010. (Official White House Photo by Chuck Kennedy)
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You just signed away your leverage.

Whether President Obama’s economic policy speech will “work” is extremely hard to say. It was a long, nuanced, fact-laden talk, and how it will ultimately filter down to the handful of swing voters deciding this election is impossible to say. (If you want to disabuse yourself of any notion that elections are driven by ideas, read accounts of how swing voters think, or don’t think, about elections.) Obama did say one analytically interesting thing. He identified the Republican insistence on maintaining Bush-era tax rates for the rich as the central cause of partisan gridlock:

Governor Romney disagrees with my vision. His allies in Congress disagree with my vision. Neither of them will endorse any policy that asks the wealthiest Americans to pay even a nickel more in taxes.

Despite the fact that taxes are lower than they’ve been in decades, they won’t work with us on any plan that would increase taxes on our wealthiest Americans.

It’s the reason a jobs bill that would put 1 million people back to work has been voted down time and time again. It’s the biggest source of gridlock in Washington today.

Centrist budget hawk commentators have complained about the way Obama has harped upon taxing the rich. It is not that the moderates consider this wrong so much as they find it overblown — hiking taxes on the rich can’t solve the entire problem, so Obama is simply giving the issue too much attention, and misleadingly implying that it offers the sole solution to the long-term deficit problem. In fact, Obama is pretty clear about his desire to match higher revenue with spending cuts. He simply notes that the GOP’s opposition to raising tax revenue from the rich is so great that it blocks any compromise at all.

Obama brought this point up as a way of framing the economic choice in November. But it also raises a rarely asked question: How did Democrats blunder into this position? After all, they had it in their power to end the Bush tax cuts for the rich. The entire Bush tax cuts were set to expire at the end of 2010. Democrats still controlled Congress, and Obama outlined a firm opposition to extending the tax cuts on income over $250,000 a year. Congress could have extended the rest of the tax cuts for a couple years. But in the months leading up to the elections, Democrats in Congress had already dissolved into panic. Some feared they would be tarred as “tax-hikers” for failing to extend tax cuts for the rich. Many of them were no doubt listening especially closely to their affluent constituents, the people they raised their money from and spent the most time around.

Because Congress did nothing, Democrats lost all leverage in the tax debate. When all the Bush tax cuts were scheduled to expire at the end of 2010, Republican were able to hold the middle-class tax cuts hostage in order to extend the tax cuts just for the rich. (Cancelling the middle class tax cuts would have harmed the recovery. Because the rich spend a much lower percentage of their income, ending the tax cuts for the rich would have had a far more modest effect on consumer demand.)

Obama’s comments really underscore how badly the Democrats blew it by failing to act on taxes. Returning taxes to Clinton-era levels is their biggest “ask” in the budget wars. If they had locked that in, it’s very possible they could have cut a big long-term deficit agreement with Republicans. The fears expressed by moderate Democrats on taxes were simply bizarre — the notion that they’d be attacked for extending tax cuts for all earners, on income up to a quarter million dollars a year, and could not possibly defend themselves, and that this fear justified surrendering their chance to shape the long-term budget debate, is almost depressing beyond words. It was insane at the time and only looks worse in retrospect.

How Democrats Let Republicans Paralyze D.C.